By Luca Benzoni and Olena Chyruk- Federal Reserve Bank of Chicago
We broadly think of ‘human capital’ as the set of knowledge, skills, health, and values that contribute to making people productive (e.g., Becker 1964 and Rosen 2008). In a free society,any contract written against future labor services is not strictly enforceable, and ownership of human capital is restricted to the person who embodies it (labor income is a non-traded asset).
Hence, any quantitative analysis of the value of human capital is necessarily based on the present value of a person’s future labor income flows. While intuitive, this definition is hardly operational without sufficient knowledge of the flows of earnings and wages that an individual generates by ‘renting’ his services on the labor market and appropriate discount rates to translate those cash flows into a present value.
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